Alberta government faces hard math in Tuesday’s budget

New report finds budget woes deeper than commonly thought

Oct 22, 2015

Parkland Institute

A new report released today by Parkland Institute finds that the new NDP government has been left with a bleak fiscal reality as it prepares to table its first full budget on Tuesday, with a budget shortfall that could be twice as large as is commonly understood.

In Hard Math, Harder Choices: Alberta’s Budget Reality, University of Alberta Department of Economics Professor Emeritus Melville McMillan argues that while most attention has focused on the budget implications of the recent drop in resource revenues, when infrastructure spending is also taken into account the province is actually facing a deficit in the order of $10 billion (see backgrounder below).

“The Notley government has inherited from the Conservatives a budget problem that goes beyond the collapse of global oil prices,” McMillan explains. “Years of low-tax policies have resulted in a structural deficit in the province, meaning that unless steps are taken to address the situation, even when oil prices recover the government won’t be bringing in enough revenue to meet its total expenditures.”

McMillan says previous governments obscured this reality by first drawing down financial assets and then turning to borrowing to finance needed capital (infrastructure) spending. Borrowing began in 2009-10, and debt for infrastructure spending approached $12 billion in 2014-15 and is projected to reach $31.2 billion by 2018-19.

Despite frequent claims that Alberta has a spending problem, McMillan found that when population growth, inflation, and real incomes are taken into account, Alberta’s program spending has been relatively flat since 1999-2000, and average compared to other provinces. Since 2010-11, the trend in provincial spending has been downward.

“The simple reality is that Albertans pay much lower taxes than other Canadians – between $11 billion and $24 billion less each year than citizens of other provinces – for roughly the same level of program spending,” explains McMillan. “The recent drop in resource revenues and the expected slow recovery has left Albertans with a choice: accept drastically lower program and infrastructure spending in the coming years, or accept higher taxes than they’ve become accustomed to.”

The good news, says McMillan, is that if Alberta returned to taxation levels of the pre-boom 1990s, it could maintain its current level of program spending and achieve truly balanced budgets by 2019-20 and still maintain a “tax advantage” of $5 billion (or $1,200 per person) compared to BC, the next-lowest-taxed province.

Parkland Institute is a non-partisan public policy research institute in the Faculty of Arts at the University of Alberta. The report Hard Math, Harder Choices: Alberta’s Budget Reality is available for download on Parkland’s website at parklandinstitute.ca.

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Backgrounder – Overview of Key Findings

Provincial Spending

Provincial spending per capita has been stable since 2008-09. Expenditures that year were $10,138 per person, and had only grown to $10,464 in 2014-15.

Taking population change, price change, and real income change into account (by measuring provincial expenditure as a percentage of household income): - Between 1999-2000 and 2013-14, provincial spending has been a strikingly uniform percentage of household income, averaging 20.3% and only ranging from 19.4% to 21.7%. - Since 2010-11, provincial spending as a percentage of household income has been falling, from 21.7% to 18.7% in 2014-15. Notably, Albertans only experienced lower levels of relative spending during three years in the midst of the Klein-era cuts.

Alberta is an average spender compared to other provinces: - Alberta has not been the highest per capita spending province since 1994-95, and on average Alberta has ranked fourth in per capita spending and spent just 3.2% more than the average province

Provincial Revenues

Revenues have been more volatile than expenditures, largely due to resource revenues, which averaged 8.1% of household income from 1999-2000 to 2008-09 but have dropped to 4.5% by 2014-15. They are expected to be less than 2% over the next three years, and only reach 3% in 2019-20.

Own-source revenues (taxes, fees, etc.) over the same period have declined, from 14.24% of household income in 1999-2000 to 12.1% in 2014-15 (and an average of 11.6% since 2010-11). This represents a 15% to 18.5% drop in Albertans overall tax load over that timeframe.

Provincial Assets and Debt

Alberta remains the only province with no net debt (financial assets are more than total debt).

Net financial assets (savings) peaked in 2007-08 at $39.4 billion and have been reduced – primarily to cover recent deficits – to $20.1 billion at the end of 2014-15.

The province has recently been relying on borrowing to fund capital (infrastructure) spending, increasing accumulated debt from $4.6 billion in 2011-12 to $11.9 billion in 2014-15, with a forecast to reach $31.2 billion by 2018-19.

The Budget Problem

The revenue loss from 2014-15 to 2015-16 is an estimated $7.2 billion, translating into an expected deficit of $5.7 billion, due mainly to the drop in resource revenues.

When both program spending and capital expenditures are taken into account, an additional $5 billion a year is necessary to avoid the need to borrow, meaning the total revenue deficiency is actually in the order of $10 billion.

If Alberta is to be put on a sustainable fiscal path, Albertans will need to drastically lower program and infrastructure spending or raise taxes (or a combination of the two).

Albertans pay between $11 billion (BC) and $24 billion (Nova Scotia) less than taxpayers in other provinces

New revenue sufficient to maintain current (and already reduced) levels of program expenditures and eliminate the need to borrow for infrastructure by 2019-20 would mean reducing Alberta’s “tax advantage” to $5 billion ($1,200 per person) by 2019-20.

Parkland Institute is an Alberta-wide, non-partisan research centre situated within the Faculty of Arts at the University of Alberta. Parkland Institute studies economic, social, cultural, and political issues facing Albertans and Canadians, using the perspective of political economy. more »